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Zynga Files for $1 Billion IPO

Social games maker looks at a future beyond Facebook

Zynga, the social gaming company behind hits like CityVille and FarmVille, just filed its S-1 form laying out its plans to raise up to $1 billion in a public offering.

There's a massive audience for Zynga games, with the company saying that it averages 232 million active users every month, more than "the next 15 social game developers combined." The games are free, but players can pay to buy virtual goods, and Zynga also runs in-game advertising. The company reports that it brought in $597 million in revenue in 2010 (up from $121 million in 2009 and $19 million in 2008). And after two years of losses, Zynga says it also earned a profit of $90.6 million that year.

"And now, by offering our shares to the public we hope to enable Zynga to invest more in play than any company in history," founder and CEO Mark Pincus writes in his letter to shareholders. "To accomplish this, we will continue to make big investments in servers, data centers and other infrastructure so players’ farms, cities, islands, airplanes, triple words and empires can be available on all their devices in an instant. We will also continue to fund the best teams around the world to build the most accessible, social and fun games."

Of course, there are some obstacles to continued growth, and the S-1 covers them in the required section on Risk Factors, which echoes many of Zynga's common criticisms. Biggest is all is its heavy dependence on Facebook—a sometimes contentious relationship that was apparently resolved last year, when Zynga agreed to use the Facebook Credits currency in its game. That agreement expires in 2015, and Zynga says, "Any deterioration in our relationship with Facebook would harm our business."

Zynga is looking at gaming outside of Facebook, too. The company notes that Internet usage beyond PCs, for example on smartphones and tablets, is growing. After relatively unsuccessful attempts to launch its own smartphone games, Zynga acquired startup Newtoy and its popular game Words with Friends, but even so, the company says its limited experience in this market makes it "difficult to know whether we will succeed in developing commercially viable games for mobile."

The S-1 also acknowledges that Zynga has been involved in intellectual property disputes. (To put it less politely: Competitors have accused Zynga of stealing patented and copyrighted material.) As these disputes continue, Zynga says that it doesn't expect to lose in court, but that could turn out to be wrong, and either way legal battles are costly.